UK Bond Yields Surge After Labour Party Unveils Sweeping Tax Hike Package
The UK’s bond market has seen a significant spike in yields following the Labour Party’s announcement of a comprehensive package of tax hikes and increased borrowing. As of Thursday afternoon, the 2-year gilt yield had jumped 20 basis points, breaching 4.5% for the first time since the party took office in July. The 10-year yield also rose 15 basis points, reaching 4.5%.
Analysts Weigh In on Borrowing Projections
According to analysts at ING, the projected increase in borrowing is a major concern. “What immediately stands out is just how much borrowing is projected to rise over the next few years,” they noted. The independent Office for Budget Responsibility forecasts that borrowing will be £36 billion higher each year over the next five fiscal years.
Comparing to the Mini-Budget Crisis
While the current bond market reaction is significant, it remains relatively stable compared to the “mini-budget crisis” of September 2022. At that time, former Prime Minister Liz Truss’s unfunded tax cuts led to severe bond market swings, threatening UK pension funds and requiring emergency intervention from the Bank of England.
Inflation Concerns and Interest Rate Implications
Some analysts believe that the latest budget may prove mildly inflationary, potentially leading the Bank of England to cut interest rates at a slower pace than previously thought. Goldman Sachs analysts suggest that the budget will “reduce the urgency for sequential cuts in the near term.” However, ING analysts argue that the BOE is unlikely to change course based on the budget, given that services inflation is expected to continue falling.
Currency and Stock Market Reaction
The British pound has fallen 0.4% against the US dollar, while the FTSE 100 has declined 1.04% in mid-afternoon trading. The market reaction may have been influenced by strong European data pushing up yields on the continent, as well as general upward pressure on US yields.
Deutsche Bank Strategist Weighs In
Jim Reid, a strategist at Deutsche Bank, notes that the market reaction to the UK budget “probably wasn’t helped” by these external factors. He also points out that the higher borrowing is planned to increase investment rather than fund tax cuts, with the investments not expected to bear fruit in growth terms until after the 5-year time horizon.
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